Tuesday, February 17, 2015

What Will Happen to Housing When the Baby Boomers are Gone?

As baby boomers
age and die, adult population growth will begin to fall off sharply in the
coming decade. Though this decline will have a dampening effect on household
growth, it will occur over several decades and much may be offset by the millennial
generation beginning households of their own. Even when baby boomers do release
housing back into the market, it may not be suitable for, or desired by, younger
occupants, so despite slower adult population growth in the future, demand for
newly built housing will persist.

According to recent Census Bureau population projections, adult
population growth will start turning sharply downward later this decade (Figure 1). After increasing by close to
2.5 million each year for more than a decade, growth in the population age 20
and older will steadily decline to about 1.5 million per year by 2050, a 40
percent drop.

Source: 2014 Census Bureau population projections

Despite their improving
life expectancies, the oldest baby boomers will soon turn 70, and begin to die
off in ever-greater numbers. Today,
there are about 2.6 million deaths every year, but this number will rise to
over 4 million a year by 2050. Meanwhile, births are also projected to increase
over the same time period, but only by about 500,000. Consequently, the rate of natural increase
(births minus deaths) is projected to fall dramatically (Figure 2). Today, population
growth is about evenly distributed between migration from abroad and natural
increase. Under the new Census Bureau
assumptions, natural increase will fall to half the level of growth from
immigration by 2035, and further decline to about one third by 2050.

Source: Census Bureau 2014 population projections

Adult population
growth has generally been the primary driver of household growth in the U.S.
For most years since 1990, there have been roughly 2.5 million more adults over
the age of 20 compared to the year before. This growth came from the aging of those born in the U.S. 20+ years ago,
as well as immigration during the past two and a half decades. On average, almost half of all persons over
the age of 20 head an independent household. Therefore, the adult population growth we’ve seen over the past 25 years
alone would account for annual household growth of about 1.2 million.

Actual annual
household growth was either above or below 1.2 million because of shifts in the
age structure of the adult population, and because of changes in age-specific
rates of household formation (headship) linked to social, demographic, and
economic changes. These latter changes
include trends in marital status and fertility, minority composition and
nativity, and employment and income, to name the most important.

Age structure
changes have had a positive effect on household growth as aging baby boomers
inflated successive age groups that have higher headship rates. For example,
the oldest boomers were age 35-44 in 1990, 45-54 in 2000 and 55-64 in
2010. As they aged, the share heading an
independent household increased from 53.4 percent in 1990, 56.1 percent in
2000, and 58.5 percent in 2010. On the
other hand, recent social, demographic, and economic trends have generally had
a negative effect on age-specific rates of household formation, particularly in
the younger age groups. Higher minority shares
and delayed marriage have had a negative effect on headship
rates, as has the Great Recession’s impact on employment and income. It is important to note, however, that not
only have the effects of population aging and the broad demographic trends
affecting headship rates tended to cancel each other out, but each has
been small compared to that of adult population growth, numbering in the low
hundreds of thousands annual net household growth or decline (Figure 3).

Projected declining
adult population growth because of increasing deaths will have several effects
on housing markets, mentioned below. But it will not have an immediate and
proportional impact on household growth for a variety of reasons. First, many initial baby boomer deaths will
occur to married couples, leaving the surviving spouse to continue to head a
household. Many deaths will also occur
to people who do not head a household, but rather live in a household headed by
children or other relatives, or in institutional settings (assisted living or
nursing facilities). Declining household
growth because of increased household dissolutions among the elderly will be
spread out over many decades. Furthermore, when dying baby boomers do begin to have a larger impact on
total net household growth, aging millennials could cause the changing age
structure effect to be more positive, similar to what baby boomers exerted as
they passed into middle age, offsetting the effects of declining adult
population growth. It is also entirely
possible that a fuller recovery from the Great Recession will reverse the fall
in headship rates, further offsetting any effect of slower adult population
growth.

When we reach a
point where baby boomers are releasing housing in greater numbers back to the
market, however, we still cannot assume that it will proportionately reduce the
demand for newly built housing to accommodate young adults. Many homes vacated
by aging seniors will not be in demand by tomorrow’s young adults, being in the
wrong part of the country or otherwise unsuitable (age restricted
communities, for example). Some will be
simply too expensive. Some “affordable” vacated
homes in desirable locations will be torn down and replaced by larger
and more energy efficient / amenity rich houses targeted to older buyers. Many houses will sit on the market for long
periods of time before sellers are willing to recognize that they are
overpriced. Some homes in declining communities
will become abandoned.

In short, while the
housing market does somewhat resemble a game of musical chairs, with successive
age groups “moving up” as their incomes and families grow, and older households
exiting, this process can be inefficient for young adults moving into units vacated
by baby boomers because of the reasons discussed. In addition, the majority of baby boom household dissolutions will not take place until after
2030. It will not be until 2060 or later
that the last of the baby boomers, born in the early 1960s, will die. Between
now and 2030, new construction will still be needed to meet the housing demand from
the large cohorts under the age of 30 that are currently in the pipeline, and which
will be further inflated by any future immigration. Where that housing will be
located and what it will look like is far less certain.

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